Financial planner: use bonds as a “shock absorber”

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Equity investors are well aware of recent market movements, which are refocusing on the need to have bonds in a balanced portfolio as a “buffer”.

Last Tuesday marked a third consecutive day of losses for the market, as rising yields recently worried investors. This should force investors to rethink the use of bonds.

“My take on bonds remains that they play a vital role as a shock absorber when stocks pile up,” said Allan Roth, certified financial planner and founder of Wealth Logic in Colorado Springs, Colorado.

Gone are the days when growth-oriented portfolios were able to deliver the excellent returns of the bull run of the last decade after the 2008 financial crisis. This caused investors and financial advisers to rethink the traditional portfolio 60 -40 and consider it obsolete in the current market environment.

However, history tells us that when markets are trending down, the more bonds the better.

“An allocation of over 70% equities and the rest of bonds and cash took more than two years to recover from the 2008 financial crisis, compared to just seven months for portfolios containing over 70% of ‘bonds and cash and the rest of stocks. , according to calculations provided by Charles Schwab, ”a CNBC article said.

Two bond options to consider

One place where investors can start to get global bond exposure is the Vanguard Total Bond Market Index Fund ETF Equities (BND). BND offers bond investors a comprehensive and comprehensive solution to gain exposure to US bonds, and presents an ideal solution for investors looking to supplement their exposure to equities.

Given the rising yields, another option is to shorten the duration with safe-haven government bonds. This is where the Vanguard Short Term Cash ETF (VGSH) is a preferred option to consider.

A shorter term leads to lower interest rate risk, especially when the Federal Reserve begins to ease its stimulus measures and begins to raise rates. This ETF provides exposure to short-term government bonds, focusing on Treasury bonds with maturities between one and three years.

Overall, VGSH:

  • Seeks to provide current income with modest price fluctuation.
  • Invest primarily in high quality US Treasury bonds (investment grade).
  • Maintains a dollar-weighted average maturity of one to three years.

For more news, information and strategy, visit the website Fixed income channel.


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